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Some fiscal inklings on the Democratic primary contest

Earlier this week, I discussed some fiscal policy ideas from Donald Trump that emerged in an interview with MSNBC. I mused at the end of my piece that a Democratic Keynesian movement might be needed. However, I left out any mention of the Democrats’ fiscal plans, though the controversy over Sanders’s spending plans was a subject of more than one post that appeared here earlier in the primary season. Actually, likely Democratic nominee Hillary Clinton announced a jobs plan early in the campaign, with spending on infrastructure forming the “centerpiece” of the plan, according to this archived New York Times blog post. Her economic approach, insofar as it involves new spending, appears to emphasize investment, as New Democrat Bill Clinton did in the 1990s and early 2000s. Here is how Times writer Amy Chozick described the plan in her “First Draft” on Clinton’s infrastructure plan.

Evoking the investment in American infrastructure by Presidents Franklin D. Roosevelt and Ronald Reagan, Hillary Clinton on Monday unveiled the most sprawling — and costliest — government program of her campaign to date.

Mrs. Clinton said her five-year, $275-billion federal infrastructure program was aimed at creating middle-class jobs while investing heavily in improving the country’s highways, airports and ports. Bridging the “infrastructure gap” between the United States and developing nations like China would also eliminate red tape and fuel overall economic growth, she said.

The total amount of stimulus in the plan would be somewhat modest as a percentage of GDP. If GDP is $16 trillion in each of the 5 years of the plan, then the extra spending would amount to .34 percent, or about one-third of one percent, of GDP each year.  Such a move would be laudable, given the deficit in infrastructure spending in the US in recent years, at least compared to no increase at all. (On the dire need for greater infrastructure investment–road and bridge repair, new school buildings, etc.–see this April piece from the New Yorker.) As Keynesian stimulus aimed at boosting employment and private-sector spending, it would be modest. On the other hand, employment has mostly recovered since the last recession. A larger plan that incorporated other kinds of employment might be desirable, but Clinton is likely to share the view of most mainstream policymakers that little further reduction in unemployment is possible without setting off an acceleration of inflation.

Clinton also included a no-new-tax vow for the middle class:

Mrs. Clinton has repeatedly told voters that she will not raise middle-class taxes. “I’m the only Democratic candidate in this race who will pledge to raise your incomes, not your taxes,” Mrs. Clinton often says, a reference to Senator Bernie Sanders’s health care plan that she says amounts to a tax increase.

This Clinton promise does well in meeting the non-austerity test to be a solid Keynesian program or plan. It might be of help to some readers to hear that it would more or less go without saying that she would not likely plan to raise taxes for people with below-middle-class incomes. The tax contribution of this group (Social Security taxes, etc.) is a oft-neglected feature of the U.S. tax system in the political debate, although on the other hand, means-tested tax credits help to reduce the net tax payments of this group.

On the other hand, the overall fiscal plan nonetheless sticks with the fiscal principle of pay-as-you-go, with new spending balanced by new revenues. Some readers may support such an idea, which enjoys much support in Congress from both sides of the aisle. Chozick describes the revenue side of the plan as follows:

The plan would increase federal funding for infrastructure by $275 billion, with $250 billion from direct public investment and $25 billion to create a national infrastructure bank. The campaign said the plan would be fully paid for by reforming the business tax code, but did not provide additional details.

The infrastructure bank plan would take advantage of leverage to allow a multiple of the budgeted amount to be spent on infrastructure by using the allocated funds to raise private-sector capital. Here we find a reduction in the net impact of the plan (aside from the services provided down the road by the new infrastructure), since almost any tax increase lowers rather than increasing current private-sector spending. Nonetheless, various business-tax reforms may be desirable in that they simplify or rationalize a highly complex system.

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